Cryptocurrency – its status as money

The cryptocurrency craze is fascinating to an economist, or at least a student of catallactics, because it is a test of the theory of exchange ratios and prices, which is what catallactics is about.

For this reason, the outcome of the cryptocurrency craze is of great theoretical interest. It is also of interest to students of the psychology of speculation.

Supporters of cryptocurrencies claim they are money. If they are unable to substantiate this claim, then we must conclude that cryptocurrencies are only a medium for speculation, drawing on increasing numbers of the public to maintain their value. For this reason, their validity as money is fundamental to their future. Supporters of cryptocurrencies are certainly very sensitive to accusations that they are not money, presumably for this reason.

Mere opinions do not matter. A critical, detached analysis is needed. The purpose of this article is to test the proposition, that cryptocurrencies are money, from a sound theoretical perspective.

The basis of money

Before cryptocurrencies, there was government money, and before that metallic money, which was gold and silver. Government money evolved out of metallic money, drawing upon it for its credibility, before abandoning all pretence at convertibility when the US Treasury finally abandoned the dollar peg in 1971. The difference between the two is gold and silver are chosen by people exchanging goods in free markets, while government money is imposed on people by their governments.